Audi 2014 Annual Report Download - page 234

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECOGNITION AND MEASUREMENT PRINCIPLES
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The item “Available-for-sale financial assets” includes non-
derivative financial instruments that are either allocated to
this category or cannot be allocated to any of the other cate-
gories. This includes equity instruments, such as shares in
equity, and debt instruments, such as interest-bearing securi-
ties. As a general rule, financial instruments that fall into this
category are reported at fair value. In the case of listed finan-
cial instruments – exclusively securities in the case of the Audi
Group – the fair value corresponds to the market value on the
balance sheet date. Fluctuations in value are accounted for
within equity in the reserve for the market valuation of securi-
ties, after taking deferred tax into account. Lasting impair-
ment of the fair value is included in the financial result.
“Available-for-sale financial assets” are impaired if there is
objective evidence of a long-term loss of value. In the case of
equity instruments, a permanent value reduction is deemed to
have occurred if the market value falls below the cost of pur-
chase on a significant basis (more than 20 percent) or on a
long-term basis (more than 10 percent of the average market
prices throughout a year). Debt instruments are impaired if
future payment flows from the financial asset are expected to
fall. Any rise in risk-free interest rates or credit spreads, how-
ever, does not constitute objective evidence of a loss in value.
As soon as impairment occurs, the cumulative loss is removed
from the reserve for fair value measurement of securities and
recognized in the Income Statement. Reversals of impairments
– provided that the securities affected are equity instruments –
are recognized without affecting profit or loss. If, on the other
hand, the securities concerned are debt instruments, impairment
losses are reversed with an effect on profit or loss (no higher
than the previous impairment amount) if the increase in the
fair value, when viewed objectively, is based on an event that
occurred after the impairment loss was recorded with an effect
on profit or loss.
As well as securities, the item “Available-for-sale financial assets”
also contains investments in non-consolidated subsidiaries and
other participations that are not valued according to the equity
method. As there is no active market for these participations
and their fair value cannot be reliably ascertained, they are
carried at their cost of purchase. Where there is evidence that
the fair value is lower, corresponding value adjustments are
carried out. As of the balance sheet date, there is no intention
to sell any material participations.
// DERIVATIVE FINANCIAL INSTRUMENTS AND
HEDGE ACCOUNTING
Derivative financial instruments are used as a hedge against
foreign exchange and commodity price risks for items on the
Balance Sheet and for future cash flows (underlying transac-
tions). Futures, as well as options in the case of foreign
exchange risks, are taken out for this purpose.
Additionally, under the rules of IAS 39, some contracts are
classed as derivative financial instruments:
>rights to acquire shares in companies,
>agreements entered into by the Audi Group with authorized
dealers with a view to hedging against potential losses from
buy-back obligations for leased vehicles.
According to the rules, hedge accounting is used if a clear
hedging relationship between the underlying transaction and
the hedge is documented and its effectiveness demonstrated.
Recognition of the fair value changes in hedges depends on the
nature of the hedging relationship.
When hedging against exchange rate risks from future cash
flows (cash flow hedges), the fluctuations in the market value
of the effective portion of a derivative financial instrument are
initially reported within equity in the reserve for cash flow
hedges, with no effect on profit or loss, and are only recog-
nized as income or expense under operating profit once the
hedged item is due. The ineffective portion of a hedge is rec-
ognized immediately in profit or loss. Derivative financial
instruments that are used to hedge market risks according to
commercial criteria but do not fully meet the requirements of
IAS 39 with regard to effectiveness of hedging relationships
are categorized as “measured at fair value through profit or
loss.” Rights to acquire shares in companies, and the model for
dealer hedging against potential losses from buy-back obliga-
tions for leased vehicles, are also reported in accordance with
the rules for “financial instruments measured at fair value
through profit or loss.” The results from “financial instruments
measured at fair value through profit or loss” are reported
under the financial result.